Asset managers and academics put their best minds to work on developing investment strategies that aim to beat the markets. One company has a different take: let the people decide what should go into a publicly traded investment fund.
That philosophy led to this week’s launch of the CrowdInvest Wisdom ETF (WIZE), an exchange-traded fund that tracks the CrowdInvest Wisdom Index. The index was created by CrowdInvest, a New York City-based company founded by Martin Mickus, who previously served as a portfolio manager at Madison Square Investors, a subsidiary of New York Life, and at Allianz Global Investors.
He created CrowdInvest as a way to democratize the asset management process based on the wisdom of the crowd, which the company does through its Crowd-Invest app where users provide bullish or bearish opinions on particular U.S. stocks, or they ignore a stock without expressing an opinion.
The mobile app was rolled out in late 2014, and the CrowdInvest Wisdom Index––whose 35 holdings are based on the collective opinions of the mobile app users––was created in January 2015. The index components are U.S. equities with an average daily volume of more than $15 million over the prior 20 trading days.
Mickus says the index follows a rules-based process, with no human interaction between the voting process and the index and ETF. How it works is that the index is rebalanced monthly, during which the three or four most popular stocks based on sentiment data on the mobile app replace the same number of the least popular stocks.
“We chose only three to four per month because we were conscious of wanting to minimize the turnover and tax implications,” Mickus says. “Last year the turnover was 100-and-something percent, which was inline with the average mid- to large-cap mutual funds.”
The WIZE fund is marketed as a smart-beta product where equities are weighted as per the sentiment expressed by an independent, diverse crowd. The maximum and minimum weights are 4.9 percent and 1 percent, respectively. As with many smart-beta products, it’s murky whether this ETF is active or passive.
“The broad market-based indices––the S&P 500 and Dow––we think those are bad representations of the market,” Mickus says. “The S&P is quite active in terms of which stocks come in and go out of the index, and weighting the S&P by market cap comes with inherent biases such as size and momentum.
“We think creating indices based on crowd input and weighting those stocks by sentiment is a more intellectual way of creating a market-based index,” he continues. “From that perspective, I think this is very passive.”
It’s logical to ask whether a fund based on crowd sentiment that picks the most popular stocks is nothing but a performance-chasing product destined to be filled with holdings bid up to pricey valuations. Mickus posits that hasn’t been the case, at least so far.